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Start leading with Objectives and Key Results, the Silicon Valley leadership model. With OKR Academy you will understand the core principles of the OKR model and learn how to implement the method in your company. 

Why you should not link OKRs with a Bonus Systems

OKR Academy Blog

On The OKR Academy Blog we regularly post customer stories, give best practice OKR examples and write about working with OKRs. Besides articles directly related to OKRs, we try to blend in some digest topics that may or may not be linked to Objectives and Key Results.

Why you should not link OKRs with a Bonus Systems

Marco Alberti

During our OKR Seminars and Workshops people regularly ask us, whether they should link OKRs to a bonus model in order to motivate their employees. The clear answer is NO! In this post we explain why OKRs shouldn’t be linked to bonuses, and how they really contribute to employee motivation.

Motivation as a key benefit of Objectives and Key Results

Whether OKRs increase motivation among employees has nothing to do with linking the model to a bonus system. One of the core aspects of OKRs is to create a result-driven corporate culture that includes an open handling of errors. Employees shall be motivated to aim high, to fail quickly and to learn and try another way.
Essentially we assume, that motivation should come from within the employees themselves, and not from any external rewards.

Intrinsic Motivation

OKRs contribute to intrinsic motivation by different factors. Employees have clearly formulated goals and they know what they are supposed to achieve over the upcoming three months. And the bar for goal achievement is partly set by the employees themselves. That way, they don’t just chase a random number imposed by their boss. So, even if the effects of one’s work may not show immediately, one can see immediately whether he or she did a good job. You just compare the actual result to the bar you set yourself in your OKRs. Getting immediate feedback for performance encourages to get better and to achieve even more than planned.

Furthermore, motivation is driven by the transparency of the OKR model. Within a group, each member can see the progress of the others. Of course, no one wants do let his or her colleagues down. And of course, no team wants to achieve less than other teams, what creates very beneficial group dynamics. That way, OKRs not only contribute to better goal achievement, but also foster team spirit.

Performances are only compared internally of course. It’s not the team leaders and managers who review and evaluate results, but the team members themselves. This creates a subtle kind of pressure that also drives the less motivated team members to achieve better results.

All those effects come with OKRs naturally, without adding a price tag.

The Role of OKRs in Competitive Compensation Models

Researches have shown, that motivation can be undermined or driven into wrong directions by bad incentives. For example, an employee, who feels that he is not compensated adequately for his work, will soon start to adjust his performance to a level that does feel adequate. The other way round, employees, who get compensated according to goal achievement, might try to influence their goals from the beginning in order to make achievement easier.

For OKRs that would mean, that people try to set their goals low instead of setting stretch goals, and errors won’t be handled openly anymore. This way, money becomes the underlying motivation for achieving OKRs. And OKRs vice versa stop serving as an orientation for contributing to the big picture. Instead, they serve as orientation for the minimum work that still has to be done in order to get more money. As you see, the system as a whole is poised, and some of the most valuable effects are lost.

Furthermore, rewarding the performance of single employees undermines the team spirit, and the positive effects of working towards common goals get lost. It may even cause employees to elevate their personal goals over the team and company goals. For example an employee who is responsible for the allocation of resources might distribute resources in order to achieve his personal OKRs, rather than evaluating what’s best for the company.

Linking Bonus Systems to Sub Goals

The best compromise we have seen for competitive compensation with OKRs, are bonus systems linked to team sub goals. The sub goals are linked to the achievement of Team OKRs. The team members’ Objectives and Key Results should then be synced towards the achievement of a sub goal. That way, focus is kept on the team goals and thereby on the best possible contribution the team can make to the company’s success.

An example could be the contribution margin of an online marketing team. You define a certain amount that should be generated over a certain period of time. Beginning at an achievement level of 80%, the team gets a bonus. That would be a fair solution for both sides, as anything below 80% can’t be considered as a great success. Careful, those 80% have nothing to do with the 0.7-achievement sweet spot of KRs! Any result higher than 80% will increase the bonus paid to the team.

This model avoids rewarding the performance of single employees and thus the negative influences this can have on performance and team spirit. All that counts is the team goal. And that way, a bonus system can even support the positive effects of OKRs. All team members work towards a common goal, and they will support each other when difficulties get in the way of achieving the team goal. Of course the motives are not as noble as without a bonus system, but it is a good example for a fair solution.

In a Nutshell

In the end, we do not recommend to link OKRs to any bonus system. But, there are some reasonable models to integrate bonuses into Objectives and Key Results that avoid contradicting personal and company interests. The essential point is not to tie bonuses to the achievement of OKRs but to a result that contributes to the goals of the whole company.